RESEARCH

Integrated Reporting for Value Creation

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Our perception of corporate governance has evolved. Organizations are no longer judged by financial criteria alone – on the management of money coming in and out. Rather any judgement of an organization’s success and sustainability needs to also include an assessment of its strategy, performance forecasts, and social impact.

Companies such as General Electric, Novo Nordisk, SAP and Tata Steel have now adopted a framework for Integrated Reporting (IR) to bring these elements together. Creating an integrated report enables companies to communicate an holistic picture of their prospects, one that is broader than offered by traditional financial reports. Integrated reports can benefit both external stakeholders and leaders within the organization.

A recent article in RSM Discovery, inspired by research by RSM professors Steve Kennedy and Paolo Perego, focuses on the value of IR as a “genuine agent for internal change within organizations.” The article points out, that some organizations engaging in IR are yet to make the very most of what it offers in-house, and calls on academics and business practitioners to work in tandem to ensure that this new approach to corporate reporting continues to have an impact on in-house strategy and processes and is not merely a PR tool for communicating to investors and external stakeholders.

The Drivers of Integrated Reporting

IR can benefit organizations by facilitating better access and allocation of capital, breaking down internal silos to unlock hidden understandings of strategic risks and opportunities. However, these benefits must be weighed against the potentially onerous data collection and validation needed to compile credible reports and risks around “ultimately raising stakeholder expectations of multi-faceted performance.”

Although IR is about corporate accountability, it is equally valuable as a means of getting people within an organization to connect with stakeholders more effectively, “take a more global perspective on operations across the whole chain, and better understand their business model and the capitals affected and needed by an organization.” Applied effectively IR can be a catalyst for strategic change and a keystone of corporate sustainability.

Considering where IR is being applied effectively, research points to the size of the organization and its board and to the degree of gender diversity as factors, as well as geographic location – in that countries where higher investor protection and stronger rule of law exist offer the most conducive conditions for IR adoption.

Barriers to Effective IR Adoption

Barriers to IR adoption include not only the onerousness in compiling the reports, but also the nature of the organizations and their attitude to the in-house use of integrated reports. IR represents a higher-than-normal level of information disclosure, one that the boards of some organizations may not be entirely comfortable with. Consequently, many reports tend to veer too much towards the investor perspective at the expense of other stakeholders, resulting in a less complete picture of an organization’s activities and how they link in with the overall business model and strategy. In the worst cases, objectivity be lost if IR becomes an external PR exercise designed to paint an organization in a responsible, sustainable light (so-called ‘greenwashing’).

Agents of change

IR still has some way to go before being accepted and practiced widely. The challenge for academics, through research and executive education, and business practitioners by making full internal as well as external use of integrated reports, is to spread the word and encourage adoption of IR as a serious tool. It needs to be established what kind of concrete changes IR can bring about within organizations and who are the members of organizations genuinely calling out for this new way of analysing and presenting business performance and strategy.

The article suggests that organizations wishing to get involved should start by concentrating on the required internal processes before moving on to the second step of external dissemination. Communicating results externally is important, but this should not done until the organization has got its house in order. Academics and business leaders have a responsibility to work together to clarify the way IR is being practiced and harmonise the vocabulary and processes required to fully embed sustainability in business.

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